Understanding the pricing of currency risk in global equity markets

G. Andrew Karolyi and Ying Wu

Journal of Multinational Financial Management, 2022, vol. 63, issue C

Abstract: This paper explores potential economic mechanisms through which fluctuations in exchange rates are priced in international stock returns. Our investigation focuses on two currency risk factors – a dollar-risk factor and a carry-trade-risk factor – and their explanatory power for a variety of test assets comprised of monthly returns for over 47,000 stocks from 46 countries and over four decades. We find that currency risk is more likely to be priced among firms producing tradeable goods, and especially during periods of heightened exchange rate volatility. This finding is robust with respect to the evaluating criteria on firm internationalization, the benchmark factor models chosen, and the sub-periods examined.

Keywords: International asset pricing; Currency risk; Exchange rates (search for similar items in EconPapers)
JEL-codes: F30 F31 G11 G15 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:mulfin:v:63:y:2022:i:c:s1042444x21000505

DOI: 10.1016/j.mulfin.2021.100727

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